Securities exemptions allow small companies to issue shares without filing a prospectus

Peter-Paul Van Hoeken uses words like “diverse” and “colourful” when describing Canada’s system of securities regulations.

Instead of one agency overseeing the rules managing the buying and selling of shares, the country has a patchwork of regulators operating in different provinces.

So when the Dutch expatriate began working on a platform that would allow startups to raise money through crowdfunding, he spent two years figuring out how to fall in line with all of Canada’s different rules.

“Everybody at that time was in the dark about the whole crowdfunding thing, including the regulators,” said Van Hoeken, the founder and CEO of fundraising portal FrontFundr.

But in mid-September the Vancouver-based company facilitated B.C.’s first round of equity fundraising for a startup after regulators introduced new rules earlier this year.

While traditional crowdfunding involves soliciting donations to raise money for projects like films or devices, equity crowdfunding involves startups selling its shares directly to investors. Up until May, only traders regulated by the BC Securities Commission (BCSC) were allowed to sell shares. But new exemptions adopted by B.C., Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia now allow companies to sell shares through an approved funding portal such as FrontFundr.

“When the rule came out in May, that was two weeks prior to our launch,” Van Hoeken said. “It was almost like impeccable timing.”

FrontFundr had been working to fall within all the existing regulations until it found itself in a position where many of the roadblocks were removed in six provinces.

Guusto, the first B.C. startup to benefit from equity crowdfunding, raised $44,000 in its first at-bat.

Co-founder Joe Facciolo said that, considering how difficult it is for some companies to raise money outside major tech centres like San Francisco or financial hubs like Toronto, the payoff potential for startups is considerable.

“The pool of resources in Canada from angel investors is pretty limited, so we believe this mechanism helps to deepen this pool.”

But there are limits as far as what startups can raise through the new equity crowdfunding rules.

No single campaign is permitted to raise more than $250,000, and individual investors are capped at making $1,500 investments, according to BCSC rules. Startups can complete only two crowdfunding distributions a year, and those campaigns can’t run simultaneously.

The issuer has to prepare an offering document, but the startup is exempt from issuing a prospectus. Such a document provides investors with financial statements and detailed information about a company to give investors a strong understanding of what they’re putting their money into.

While the BCSC is providing startups with this exemption, the regulator is still warning investors about possible dangers they could face.

“Investing in a startup or small business is risky, and you could lose your entire investment,” according to the BCSC’s crowdfunding guide for investors. “Unlike reporting issuers [companies listed on a stock exchange], startups need not file audited financial statements or other periodic disclosure. You may receive much less information about the business, and startups do not usually attract much media coverage.”

Despite these warnings, Van Hoeken said FrontFundr’s strategy is to get regulators as comfortable as possible with the concept of equity crowdfunding.

“They’re going to stick their neck out, too. What we see now with the first deal with Guusto and the fact we could turn it around fairly quickly is a result of [how] we’ve been cooking this thing for quite a while.”